2/01/2008 @ 3:00PM

Microsoft Goes After Yahoo! In Online Advertising

Although it has long dominated the market for PC-based software,
Microsoft
has been running hard to catch up with
Google
in Internet-based services and applications.

In particular, Microsoft
has been desperate to strengthen its position in the high-growth arena of online advertising. Its acquisition of online advertising firm
aQuantive
last August was a key step in that direction, but a takeover of
Yahoo!
would lift the company to a whole new level of competitiveness.

Online advertising is becoming all about delivering the most relevant marketing messages possible, whether by contextual advertising (e.g. , serving up a text ad that corresponds to a search term) or behavioral targeting (e.g., choosing which ad to show based on someone’s Web-browsing history).

The addition of Yahoo!’s advertising inventory would greatly improve Microsoft’s ability to match the right ad to the right consumer. Yahoo! remains the largest seller of display advertising on the Internet and is a distant but steady No. 2 after Google
in search marketing. In addition, Yahoo! owns Right Media, a leading player in the emerging ad-exchange market.

Yahoo! would also be complementary to the aQuantive acquisition. AQuantive’s greatest strength is in serving parties on the “buy side” of the advertising equation–that is, advertisers and agencies looking to purchase and manage online ad campaigns.

Yahoo!’s advertising platform is strongest in serving Web publishers looking to sell ads. Its platform is widely favored by publishers over the ad platform operated by Microsoft’s MSN portal.

If Microsoft and Yahoo! did combine their search advertising auctions, where advertisers bid on the price for keywords that appear next to search results and in content networks, competition among the larger pool of bidders could push up the price of pay-per-click ads.

A combined auction would also allow Microsoft to push up the minimum price it sets, independent of bidding, at as much as $10 a click. By hiking those minimum bids, what Mark Kahn, chief executive of advertising exchange company TraffIQ, calls a “black box,” Microsoft could squeeze more from search marketers.

“If Microsoft is going to say this is better for the advertisers, they’re wrong,” he says. “It just creates a bigger black box.”

But merging Microsoft and Yahoo! search ad auctions could be a messy process. “These are two monster auctions going on, each of which has its own infrastructure and technology and people that are hard to combine,” says Andrew Wagner, chief executive of the media buying firm TrafficBuyer. “This deal won’t affect the price of search ads anytime soon.”

Where advertisers could see an immediate hike, he says, is in display ads. Yahoo! owns the most visited sites on the Web, with 113.2 million unique visitors last month, according to Nielsen/Netratings. Microsoft’s network of pages, the third most trafficked on the Web, received a total 98.3 million unique visitors, by Nielsen’s count. Combined, they represent an online content powerhouse that will likely squeeze the supply of space for large banner ads.

“The fact is, having less suppliers in the marketplace is not a positive,” says Wagner. “I don’t feel bullish about this.”

One area where a “YahooSoft” deal won’t help advertisers is in loosening Google’s search stranglehold. Despite Yahoo!’s and Microsoft’s best efforts, neither has been able to wrest eyeballs away from Google’s massive slice of search market share. In the past two years, Google’s search dominance has only grown, from 57.6 % in February 2006 to 66% last month, according to the Web measurement firm Hitwise.

Meanwhile, Microsoft’s search share has fallen from around 14% to 5%, while Yahoo!’s has held steady around 21%. That means Yahoo!’s search expertise will at best offer Microsoft a way to stanch the flow of searchers to Google, not to reverse it.

Combining two search engines has never created much more than a simple sum of market share, says search industry analyst and blogger Danny Sullivan, and that boost doesn’t usually last. Sullivan points to similar mergers in the past: The combined search audiences created by Excite’s purchase of Webcrawler in 1997, and Yahoo!’s acquisition of AlltheWeb and Alta Vista in 2003, only eroded as Google grew.

“Just because you have two television channels doesn’t mean people want to tune into both of them any more,” Sullivan says.